Yahoo Finance 6 Economic Indicators to Understand
If you want to understand the overall health of the economy, pay attention to key financial market indicators, including the unemployment rate, national debt and the consumer price index. These data points paint a picture of the country's financial well-being.
"There are a number of common economic indicators to consider when analyzing the overall health of the economy," says Nataliya Kalava, president of Araliya Valuation Consulting, a business valuation and consulting firm in Tampa, Florida. Among other indicators, Kalava suggests factoring in metrics such as job growth rate and unemployment, the budget deficit and U.S. national debt, federal spending and tax collections, stock market performance, industrial productivity, the U.S. trade gap, the housing market, consumer confidence, personal income, consumer spending and retail prices, particularly for oil and gas.
Kalava adds that when experts look at these indicators, they add up to provide "a snapshot in time of the operating sectors of the economy."
[Read: When's the Next Financial Crisis Coming -- and How Do You Prepare?]
Here are key economic indicators to understand:
-- The unemployment rate.
-- Bond yield curves.
-- Consumer spending.
-- Consumer debt.
-- Business expansions.
-- The ballpark indicator.
While there are many metrics to consider as a prediction of growth and financial prosperity, pay close attention to these key indicators for reliable insight into the state of the economy.
The unemployment rate. "Job growth is the single most important monthly indicator of the health of the economy," says Luke Tilley, the chief economist for Wilmington Trust, a wealth management firm in Wilmington, Delaware. "We added a stellar 312,000 jobs in December and another 155,000 in November. These are especially strong numbers because those jobs were spread across a variety of sectors. Growth like this points to a sturdy economy."
He adds that it's important to contextualize job growth with other consumer-oriented indicators like unemployment, wage growth and consumer spending -- all of which he believes look very encouraging. "Indicators that show what's happening to workers are extremely important because they explain what's happening to Americans' income streams."
Bond yield curves. Colin Exelby, a certified financial advisor and president and founder of Celestial Wealth Management in Towson, Maryland, pays particular attention to treasury bonds. Like many financial experts, he looks at how much interest people are receiving for a two-year bond and a 10-year bond.
"In a normally functioning economic expansion, the spread should be stable or widening. In theory, you should receive more interest for locking your money up in a 10-year bond than a two-year," he says. "However, in a contracting economy, that spread typically narrows and often a recession is around the corner if the spread goes negative, meaning if the two-year bond is yielding more than a 10-year bond, economic prospects over the coming years are not rosy."
While the 10-year bond has been higher than the two-year bond in recent weeks, the spread has been narrowing and isn't far apart. That said, economists disagree about whether a yield curve portends certain doom, so while it's worth paying attention to bond yield curves, don't panic and sell your belongings if a curve materializes. In fact, one part of the yield curve briefly inverted in early December last year, but investors and economists haven't been too concerned.
Despite the brief yield curve inversion, "we don't believe (a recession) is on the horizon," Tilley says. Still, "it's important to monitor because of this historical trend," he adds.
[Read: Where Do I Fall in the American Economic Class System?]
Consumer spending. "Macroeconomic indicators are tough, but the most pertinent ones I look at revolve around consumer spending," says Yale Bock, a portfolio manager for Interactive Brokers Asset Management in Boston. He says that Gallup produces monthly reports, as well as the Bureau of Labor Statistics, which publishes a monthly consumer price index that covers the average cost of goods such as food, housing and clothing.
You can't really tell how the economy is going with one report, Bock says, but you can get a sense of the well-being of the economy by analyzing a variety of reports and comparing them to previous years. "I think the consumer spending numbers recently buttress the major investment banks' idea that the economy is in pretty good shape but might have slowed a bit," Bock says.
Consumer debt. "I also give a lot of attention to the large money-center banks profit reports, which all have a component with credit cards involving consumer banking and merchant and commercial banking," Bock says. He also suggests paying attention to how many loans, from credit card debts to auto loans and mortgages are written off by banks and financial institutions.
Unpaid debts are climbing slightly, Bock says. He thinks delinquencies with credit cards isn't much to fret over, "but auto loans may be a bigger issue, and you could probably throw in student loans, which is a major area of debt in the country that may be the biggest area to keep your eye on as far as a (sign) on slowing growth versus tipping into recession."
Business expansions. This is a key economic data point Kalava monitors. "If we track how many new LLCs, S-corps, C-corps, sole proprietorships and partnerships are opening up, we can judge not just the overall sentiment -- positive or negative -- but also judge where the economy is heading," she says. " Entrepreneurship and small businesses are the backbone and the foundation of the economy, employing the majority of the workforce. Thereby it is the key driver and a key performance indicator of the overall health of the economy."
And if businesses are shutting down or becoming inactive, it may foreshadow an economic downturn in the future, Kalava says.
The ballpark indicator. "I regularly come across numerous economic indicators in my work such as unemployment statistics, inflation figures and productivity measurements," explains Terrance McGuire, a partner and portfolio manager at Dividend Growth Partners, an investment advisory firm in Palos Verdes Estates, California. But McGuire thinks the best and most interesting indicators can often be found by just looking around and thinking intuitively.
"One of my favorite indicators I personally use is what I call the ballpark indicator," he says. "When you go to a professional stadium, for example, take a look at where the advertising is coming from. If it's spread out among a lot of different industries, that can often be a sign of a diverse and healthy economy."
[See: 10 Tips for Couples and Young Families to Build Wealth.]
That said, if you notice a concentration of an industry -- say, over 25 percent -- that may be a warning sign that that industry may be oversaturated, which could eventually affect the economy at large, McGuire says. "Consider the sports arenas of the late 1990s. They were filled with advertising from tech companies, just before the tech bubble bust," he says. "Similarly, in the mid-2000s, housing related industries were among the heaviest advertisers, again, just before the collapse."
More From US News & World Report
